Investment Property vs Second Home: What Are the Differences?
Did you know many people want a vacation home? An investment property will provide income and or be a second home. If you want to learn the difference between an investment and a second home, keep reading.
In this guide, you’ll learn about the benefits of buying a second property. There are a few critical differences between an investment property vs a second home.
Ready to learn more? Check out the tips below.
What’s the Difference Between a Secondary House and an Investment Property?
For investors, it’s a little confusing when it comes time to buy another property. You might think about renting or using the property for a vacation.
Earning money from the property doesn’t make it an investment. Defining the property will depend on how much time you will live in it.
There’s a 14-day limit rule. If you live in the second home for two weeks or less, it’s considered a rental property. You would deduct the expenses associated with the property. The income you earn will get taxed.
If you plan to use the property for over two weeks, your rental income won’t be taxed. But you won’t deduct any of the expenses.
A second home will usually work as a vacation home. Investors will buy the property for leisure purposes and live in the house for a part of the year.
An investment property will get rented out to generate income.
Seeking a Mortgage
Understanding the distinction between an investment property and a second home is important for tax reasons, but also when you ask for financing for the house.
The loan-to-value ratio and credit score rules will vary. It will depend on what the buyer will do with the property.
An investment property has strict underwriting guidelines compared to primary or second homes. An investment property is a risk of default on properties where a borrower doesn’t live.
If the borrower has financial issues, they will keep up with the payments on their primary residence. They will make that the priority first. Thus, a second home is a riskier prospect for lenders.
An investment property might also need a larger down payment. You might need over 20 percent down for the investment property. For a second home, you might be able to get a mortgage with as little as five percent down.
Mortgage rates have started to increase. The rates are higher for a second home or investment property because they’re seen as a riskier prospect.
What About Tax Rules?
The mortgage interest on a secondary house is tax-deductible if it falls within the $750,000 total debt limit. If you don’t rent the property for over two weeks a year, you can get this deduction.
With an investment property, the mortgage interest’s tax-deductible. You can deduct the expenses related to your property as well. Deduct things like insurance, maintenance, and property taxes.
The rental income is taxable if you rent the house out for more than two weeks each year. Homeowners can deduct mortgage interest. This will get tricky if you own a second house.
You will have maxed out the amount if you have over $750,000 mortgage debt between the two properties.
Interest on a mortgage connected to an investment property is entirely deductible. It can offset income generated from the property.
Along with deducting mortgage interest, you can deduct different expenses. The IRS will deduct property taxes, advertising to renters, maintenance, utilities, and insurance. You can also deduct materials and supplies.
You could deduct their wages if you have to hire someone to complete work on the house. You cannot deduct a renovation job that will only improve the property.
You Shouldn’t Trick the Lender
Lenders will charge a higher interest rate for any investment properties. A borrower might try to claim the investment property is a second home. This way, they could rent out the properties and earn income.
If you lie about the house, you could face mortgage fraud and heavy fines. Unfortunately, occupancy fraud has grown, and underwriters know what signs to look for in applications.
Think About Your Long-Term Plans
If you choose to buy a second home, you should think about your long-term goals. Over time, you don’t want to get sick and tired of your vacation house.
If your house is a 10-hour drive, you might feel resentful after the first few trips. Would you like to stay in one area long-term? Will your second home compromise other goals?
If you like to travel to different places, then you shouldn’t necessarily buy a secondary home. Otherwise, it won’t make sense.
Vacation homes remain homes that you need to maintain, repair, and keep in solid shape. When considering buying a secondary home, think about the nearby amenities. Is this a location you will love long-term?
Think about areas you have always wanted to visit. For example, if you love Memphis, check out investment properties here. Find a property that fits your needs and goals.
Investment Property vs. a Second Home: What Will You Choose?
Did you find this guide helpful on the difference between an investment property vs. a second home? Will you look at getting a secondary house, or would you like to buy an investment property to rent out?
Think about the pros and cons of the two different properties.
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